United Kingdom VAT & Duties Tribunals Decisions

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Cite as: [2005] UKVAT V19409

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Patricia Adam T/A Cache v Revenue and Customs [2005] UKVAT V19409 (19 December 2005)

19409

VAT – belated notification penalty – imposed after terms of VAT Incentive Scheme not met – whether reasonable excuse – appeal dismissed

LONDON TRIBUNAL CENTRE

PATRICIA ADAM t/a CACHE Appellant

- and -

THE COMMISSIONERS FOR HER MAJESTY'S REVENUE AND CUSTOMS Respondents

Tribunal: JOHN CLARK (Chairman)

Sitting in public in London on 30 November 2005

The Appellant did not appear and was not represented

Jonathan Holl of the Office of the Acting Solicitor for Her Majesty's Revenue and Customs, for the Respondents

© CROWN COPYRIGHT 2005


 


DECISION

1. Mrs Patricia Adam appeals against a belated notification penalty imposed after conditions of the "VAT Incentive Scheme" were not met. For reasons of ill health Mrs Adam was unable to attend the hearing, and had informed the Tribunal in advance that she would not be doing so. She had supplied a copy of her consultant's letter dated 3 February 2005 explaining the details of her medical condition. On behalf of the Respondents (referred to in this decision as "Customs") Mr Holl therefore applied for the appeal to be heard in her absence under rule 26(2) of the VAT Tribunals Rules, and we accepted his application.
2. We reviewed matters at the hearing. Although it is customary in such cases to announce our decision and to issue a short form direction without setting out our reasons, we informed Mr Holl that we did not think this to be the appropriate course in this case, as Mrs Adam's accountants had explained in advance why she would not be attending, and had requested the Tribunal to consider matters in her absence. We have therefore prepared a full decision indicating our reasons.

The facts

3. The evidence consisted only of Customs' bundle of correspondence, from which we find the following facts. Customs wrote to Mrs Adam in February 2003 indicating that although she was in business, no VAT registration number could be traced for her. In response to the request for information, her accountants informed Customs that she had not registered for VAT as she had not been aware of the VAT thresholds; the accountants would be reviewing her position with her by reference to her books and records. Despite indications that the information was to be provided earlier, an officer of Customs in the Joint Shadow Economy Team had to request in a letter dated 10 June 2003 that figures should be submitted within ten days. On 30 June 2003 the accountant was requested to send Form VAT 1 completed on behalf of Mrs Adam. They provided a spreadsheet showing her monthly takings from April 2000 to February 2003.
4. From this information Customs established that Mrs Adam had exceeded the VAT threshold in March 2001. The officer completed Form VAT 1, the accountants having confirmed that this would be the quickest way of dealing with it as Mrs Adam had been unwell and had not been at the business for a while. The form was dated 4 September 2003.On 24 September 2003 Customs' National VAT Registration Unit wrote to Mrs Adam, advising her that as she had failed to notify her VAT registration by 1 May 2001 [the letter began by incorrectly stating the date as 2000 but later referred to the correct date], she was liable to a belated notification penalty. However, as Mrs Adam had come forward to register under the VAT Incentive Scheme (as announced in the Budget in April 2003), Customs did not intend to issue a penalty at the present time provided that she met all the conditions of the Scheme during the following twelve months. The outstanding tax due had to be paid, and all VAT returns and payments had to be sent in on time and in full for the following twelve months. The letter informed her that she did have a right of appeal against the liability to the penalty, for example if she felt that she had such grounds as reasonable excuse for the late registration. She did not appeal at that stage.
5. In a letter dated 28 October 2003, Mrs Adam's accountants supplied a breakdown of her VAT liability from 1 May 2001 to 4 September 2003. They enclosed a copy of the completed VAT return for the whole period up to 30 September 2003 inclusive.
6. From these figures Customs calculated that the belated notification penalty should have been £3,344 in addition to the tax due, but in their letter dated 17 November 2003 they informed Mrs Adam that the penalty would not be sought if the relevant conditions were met. Before the date of this letter, another officer of Customs had tried to contact Mrs Adams by telephone; after two days she had phoned back saying that she was busy and unable to talk. After further attempts to make contact, again prevented because Mrs Adams was busy, the officer agreed to send a questionnaire. Mrs Adams completed this, and added the comment that "My accountants will be dealing with all aspects of taxation".
7. On 1 December 2003 Mrs Adams contacted Customs to say that she was unable to pay the amount shown in a red letter demanding payment. She was advised to contact the Debt Management Unit. She did so in a letter dated 5 December 2003, also mentioning that she was about to have an operation, but Customs replied requesting her to submit exact proposals of the amounts and timing of her proposed payments. The sum outstanding was £12,796.90. In her reply dated 15 December, Mrs Adam set out her proposals and enclosed a cheque for the first instalment. Customs accepted the proposal.
8. On 24 February 2004 Mrs Adam wrote to Customs requesting time to pay the outstanding balance of £4.000 in three equal instalments on 9 and 23 March and 7 April. Customs accepted this proposal on various conditions, in particular that future VAT returns were to be rendered by the due date and to be accompanied by payment of the tax declared. On 20 April 2004 Customs wrote to Mrs Adam giving her a "Seven Day Warning" that failure to bring the arrears up to date would result in cancellation of the "time to pay" agreement.
9. On 18 November 2004 Mrs Adam wrote to Customs' Debt Management Unit relating to an outstanding amount of £13,088.50. She proposed to pay the overdue amount by the end of the year, in four equal instalments, the first being sent with her letter.
10. On 26 November 2004 Customs decided to impose the belated notification penalty. Although Mrs Adams had submitted all the VAT returns on time, payment had been made under "time to pay" agreements. The penalty would be mitigated by 25 per cent. The penalty was notified to Mrs Adam in Customs' letter dated 19 January 2005, which stated that the penalty had been reduced from £3,344 to £2,508 (shown as "mitigated" in the accompanying penalty notice).
11. Mrs Adams' accountants wrote on 15 February to Customs' Appeals and Reconsideration Team, to appeal on her behalf against the imposition of the penalty. They referred to continual problems of substantial loss of stock due to theft, which had compelled Mrs Adam to invest in CCTV and electronic tagging. They also referred to her medical condition as confirmed by a copy of the letter from her consultant. They enclosed copies of police reports relating to the thefts.
12. On 26 February 2005 Mrs Adams wrote to Customs asking for time to pay the outstanding balance of£8,669.70 in equal instalments. She had hoped to pay a larger first instalment, but adverse weather conditions had resulted in much lower sales than anticipated. She referred to her appeal against the penalty. On 3 March 2005 Customs accepted the "time to pay" proposals. In their letter dated 10 March 2005, Customs' Wolverhampton Registration Unit indicated the result of their reconsideration of the penalty, which was that they could find no grounds for withdrawing it. Mrs Adam wrote on 29 March 2005 setting out facts that she considered relevant to her case. This resulted in a further reconsideration of the case, but on 28 April 2005 Customs stated their view that the penalty had been correctly issued.

Contentions of the Appellant

13. To the extent not already referred to above, we set out the further arguments put in correspondence by Mrs Adam and her accountants. Mrs Adam had been extremely unwell throughout 2001, and had to be hospitalised to stabilise her condition. Her lung and breathing problems had developed into pneumonia, and she was again in hospital in 2003. She referred to the cost of the security installation following the thefts, and to the resultant shortfall. In relation to her medical condition, she provided a letter from her doctor confirming that her condition resulted in recurrent pneumonia, and that she had been in hospital from 20 to 23 December 1999 and for ten days in June 2003. On the subject of the thefts, she stressed the financial consequences of suffering the thefts, and re-emphasised the substantial costs of installing the security systems.

Contentions for Customs

14. Mr Holl argued that Mrs Adam could not plead ignorance of VAT. In starting the business, it must have been necessary for her to consider tax generally, including direct tax and National Insurance. These were matters on which she would have needed to consult her accountants. From the medical information provided, Mrs Adam must have been aware of her ill health before the business commenced. The retail environment was likely to be stressful, and Mrs Adam must have given this some thought. Taking into account the amounts shown in the VAT returns, Mr Holl pointed out that despite Mrs Adam's ill health, she had been running a business turning over between £45,000 and £50,000 a quarter. The problem did not start after the beginning of the business, and the stress was not unexpected.
15. Mr Holl considered that Mrs Adam had not made a sufficient case for the removal of the penalty. Further, he felt that there had been insufficient reasons for mitigation. It had taken Mrs Adam many months to provide figures. One would have expected basic records to be available for the periods to 12/01 and 12/02 by 2003. No completed form VAT 1 had ever been received from Mrs Adam; it had been completed by Customs. Mrs Adam should have been alerted to her liability to register at the time when her turnover exceeded the threshold. Mr Holl argued that there had been no reasonable excuse for her failure to notify liability to register, and that there were no grounds for mitigation of the penalty imposed. The appeal should therefore be dismissed.

Conclusions

16. It is clear that Mrs Adam failed to notify her liability to register for VAT by the required date, 1 May 2001. If the VAT Incentive Scheme had not been in force at the time, the penalty would have been imposed at that stage. However, under the terms of that scheme, Customs decided not to do so. Their decision was expressly subject to conditions. The relevant conditions as far as this appeal is concerned were that the outstanding tax due had to be paid, and that all VAT returns and payments had to be sent in on time and in full for the following twelve months.
17. For the various reasons set out in the correspondence, Mrs Adam turned out not to be able to comply with these conditions. Customs gave her time to pay, acknowledging that she was suffering various trading difficulties. However, their acceptance of such arrangements did not change the basic position, that Mrs Adam had originally failed to notify her liability to register and had then failed to fulfil the conditions of the Incentive Scheme. The terms of the scheme were designed to encourage compliance by giving traders a chance to clear their record and deal normally with their returns and payments for the specified "probation" period. Although Mrs Adam's VAT returns were submitted on time, her payments were not made at the times when they should have been. As a result, we accept that the penalty was properly imposed.
18. Such penalties can be mitigated where there is a reasonable excuse. Customs accepted that some mitigation was appropriate, and reduced the penalty by 25 per cent. It is open to us to reconsider the degree of mitigation, and if we think it appropriate to do so, to adjust the level of mitigation either upwards or downwards, thus reducing or increasing the penalty. We have considerable sympathy with the difficulties that Mrs Adam was suffering, but we do not consider that it would be right to change the level of mitigation in this case. The legislation (section 70 of the Value Added Tax Act 1994) prevents us from taking into account insufficiency of funds, or that there has been no significant loss of VAT, or that the trader (or anyone on the trader's behalf) has been acting in good faith. On the question of insufficiency of funds, we do not think that the circumstances involve any underlying reason for this; in a retail business, the VAT on sales is collected at the point of sale and therefore the funds are available to be retained by the trader to discharge the liability to account to Customs for the net VAT due for the period.
19. The appeal is therefore dismissed. There was no application for costs, so none are awarded.

JOHN CLARK

CHAIRMAN

RELEASE DATE: 19 December 2005

LON/05/0409